Tuesday Tip — Should I get a 401(k) or IRA?

June 12, 2018

So, it’s time for you to start thinking about retirement. A 401(k) or IRA are both great options. Whether you just graduated college and started working at your first job or are in your 50’s, it’s never too early or late to start saving for your golden years. Proper savings enables you to avoid consumer debt and live in a comfortable nest egg. Which savings account is right for you? Weigh the pros and cons of both a 401(k) or IRA.

Should I Get a 401(k) or IRA?

Ideally, you should have both a 401(k) and an IRA. A 401(k) is a retirement plan sponsored by an employer, whereas a traditional or Roth IRA is self-directed savings vehicles. Making a decision between the two depends on several variables. Primarily, if your employer offers a 401(k) with a company match, prioritize a 401(k) over an IRA. If your employer does not offer a company match, skip the 401(k) and start with an IRA. Here are the differences between a 401(k) and a traditional IRA.

Pros & Cons: 401(k) vs IRA

A 401(k) is a great option to have if your employer offers a match. If you are under 50, you will be able to contribute up to $18,500 a year, and up to $24,500 for those aged 50 or above. Contributions also lower taxable income in the year they are made. Unlike a traditional IRA limiting people by age or income (you must be below 70 1/2 years with an earned income), the only stipulation to a 401(k) is that your employer must offer the plan. Lastly, funds in a 401(k) may be less expensive than identical funds purchased outside of a 401(k).

If you are looking for more control over plan and investment costs, an IRA may be right for you. With an IRA, you can invest in a much wider variety of mutual funds than a 401(k), including exchange-traded funds and individual stocks and bonds. Most employers limit you to a pre-selected list of investment choices through a 401(k). There is a lower contribution limit; $5,500 if you’re under 50 and $6,500 for those 50 or above. If there is a deductible, contributions lower taxable income in the year they are made.

The Bottom Line

You should take advantage of a 401(k) if you have access to one. Fund your 401(k) to get the maximum matching dollars, then consider an IRA. An IRA is a great way to supplement your savings and pay off debts. If you don’t have a company match, go directly to an IRA and contribute up to the limit. Then, fund your 401(k) for the pre-tax benefit it offers.

About Blog

Talking Cents was created by the staff of the nonprofit organization, American Consumer Credit Counseling (ACCC). Not satisfied with providing credit counseling, debt management, and financial education alone, these renegade employees took to the blogosphere in the hopes of helping not only their current clients, but the rest of the world at large to tackle more of the topics affecting people’s everyday financial lives.